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The estimation of implied volatility from the Black-Scholes model: some new formulas and their applications

  • Steven Li
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    This paper provides a more accurate formula for estimating the implied volatilities for at-the-money calls than the existing formula as developed previously by Brenner and Subrahmanyam (1988). New formulas are also given for estimating the implied volatilities of in- or out-of-the-money calls. These formulas are derived mathematically and assessed by using numerical tests. All the new formulas are easy to use and accurate for a wide range of option moneyness and time to expiration.

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    File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2003/DP%20141%20Li.pdf
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    Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 141.

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    Date of creation: 20 Feb 2003
    Date of revision:
    Handle: RePEc:qut:dpaper:141
    Contact details of provider: Postal: GPO Box 2434, BRISBANE QLD 4001
    Web page: http://www.bus.qut.edu.au/faculty/economics/Email:


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    1. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    2. Chance, Don M, 1996. "A Generalized Simple Formula to Compute the Implied Volatility," The Financial Review, Eastern Finance Association, vol. 31(4), pages 859-67, November.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    4. Chambers, Donald R & Nawalkha, Sanjay K, 2001. "An Improved Approach to Computing Implied Volatility," The Financial Review, Eastern Finance Association, vol. 36(3), pages 89-99, August.
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